How China Played Its Trump Card At The G20 Summit And Gained The Upper Hand In Trade War

U.S. President Donald Trump, left, speaks with Theresa May, U.K. prime minister, during the plenary at the G-20 Leaders' Summit in Buenos Aires, Argentina, on Friday, Nov. 30, 2018. The meeting comes against the backdrop of populist governments and President Trump's questioning of the system of trade rules that has underpinned global commerce for decades.Photographer: Erica Canepa/Bloomberg

Despite the positive atmospherics, our data continues to indicate that the bilateral meeting between Presidents Trump and Xi at this past weekend’s G20 summit did not -- and more importantly, will not -- result in a major breakthrough in the U.S.-China trade dispute.

Per the graph, note that while the G-20 “cease fire” -- whereby both sides agreed to a temporary cessation of tariff increases and a 90-day negotiation window, while China agreed (in very general terms) to purchase more U.S. goods-- comes near a low in Chinese Investment/ Trade Policy Risk, that risk is still projected to increase significantly in the coming months. This is because the meeting made little headway toward resolving the core long-term issue underlying the trade dispute – notably, U.S. allegations that China continues to illicitly acquire advanced technology from U.S. firms with potential national security implications – suggesting that U.S.-China trade tensions are likely to continue for the foreseeable future.

China: Investment/Trade Policy RiskGeoQuant 2018

Moreover, the G20communiqué – whichhighlights the need to reform the World Trade Organization (WTO) to better manage the multilateral trading system – is similarly unlikely to further a quick resolution of the U.S.-China trade dispute and, despite being highlighted by many observers as a summit success, is more likely to prolong it.

Macron and the 'Yellow Vests'

The recent spate of social unrest in France has driven Social Risk to its highest point since the controversial demolition of the Calais "Jungle" migrant camp in October 2016. Note that our Social Risk indicator for France has been up rapidly since August 2018, driven in large part by growing socio-economic polarization.

France: Society RiskGeoQuant 2018

Indeed, Social Instability Risk in France (yellow line below) is still forecast to rise going into mid-December, suggesting that the "Yellow Vest" socio-economic protests will persist and that the government's mooted reimposition of a 'State of Emergency' is a real possibility. At the same, our indicators suggest President Emmanuel Macron will survive the crisis -- probably by walking back his contentious fuel price hike as the price to do so. Note that by the time Social Instability Risk peaks, we forecast that Government Instability Risk (pink line) will already begin stabilizing, a good sign for Macron.

GeoQuant indicators continue to support ourearlier forecast that a politically-driven oil shock is unlikely despite a build-up of geopolitical tensions. Any production cuts by Russia and/or Saudi Arabia are unlikely to be significant to the broader bear market for oil, suggesting only a minor price rebound beginning in late Q4/2018 following the upcoming OPEC meeting.

Per the graph below, our proprietary suite of Oil Price Risk indicators – composite metrics that are positively correlated with (and structurally independent of) oil prices – continue to maintain a sharp downward trajectory through Q4/2018 and are anticipated to remain low/stable through at least Q1-Q2/2019, with correlations between these indicators and oil prices rising to .97-.98 from October 2018 onwards.

At the country-level, our forecasts of Investment/Trade Policy Risk and International Relations Risk for both Saudi Arabia and Russia following the Dec. 6 OPEC meeting reinforce this interpretation, with Investment/Trade Policy Risk remaining slightly elevated for Saudi Arabia into Q1-Q2/2019 (indicative of ongoing macro-economic pressure induced by low prices) and declining IR Risk anticipated for both countries (suggesting no major strain in relations caused by an OPEC-led oil market shock).

Institutional risks to King Dollar

It’s unclear if Fed Governor Jerome Powell will still testify before the Joint Economic Committee on Wednesday (the day has been declared a National Day of Mourning). But if he does, watch for another sensitive response from the USD, as occurred last week. In conjunction with a new frenzy of developments in the Mueller probe and the reality prospect of a Democratic controlled House come January, a recent bout of (particularly acerbic) criticism by US President Donald Trump of Fed rate hikes echo our post-midterms analysispredicting (i) an increase in US Institutional Risk, including more political pressure on the Fed; and (ii) that this higher Institutional Risk would be dollar negative, continuing a trend that has strengthened greatly in 2018.

I'm a Berkeley-trained political economist and entrepreneur specializing in geopolitical risk analysis. I am co-founder and CEO of GeoQuant, a startup company fusing political science with computer science to decode and monetize political risk for global investors. I teach ...